Applications for Exemption

Effective July 1, 2014, the IRS adopted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. For organizations that are eligible to use the new Form 1023-EZ can complete a 3 page online application form, pay a $400 filing fee and obtain an IRS determination letter that the organization is a tax-exempt 501(c)(3) organization within two to four weeks. To learn more about this new application process, the Form 1023EZ, the eligibility requirements and potential negative consequences of using the streamlined form instead of the lengthy and more complex IRS Form 1023, read my article called “IRS Form 1023-EZ.” For the complete list of disqualifications see the “IRS Form 1023-EZ Eligibility Test.”

The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

“Previously, all of these groups went through the same lengthy application process — regardless of size,” Koskinen said. “It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today’s announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.

“We believe that many small organizations will be able to complete this form without creating major compliance risks,” Koskinen said. “Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

The new EZ form must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

There are more than a million 501(c)(3) organizations recognized by the IRS.

Organizations whose tax-exempt status was automatically revoked because they did not file required 990 series returns or notices for three consecutive years can apply for reinstatement of their tax-exempt status.

Streamlined Retroactive Reinstatement

Organizations that were eligible to file 990-EZ or 990-N (ePostcard) for the three years that caused their revocation may have their tax-exempt status retroactively reinstated to the date of revocation if they:

Have not previously had their tax-exempt status automatically revoked.

Complete and submit Form 1023 or Form 1024 with the appropriate user fee not later than 15 months after the later of the date of the organization’s Revocation Letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

These organizations should write on the top of the Form 1023 or Form 1024, “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement,” and mail the application and user fee to:

Internal Revenue Service P.O. Box 12192 Covington, KY 41012-0192

In addition, the Service will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure and files properly completed and executed paper Forms 990-EZ for all such taxable years. (For any year for which the organization was eligible to file a Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ to avoid penalties.) The organization should write “Retroactive Reinstatement” on the Forms 990-EZ and mail them to:

Department of the Treasury Internal Revenue Service Ogden, UT 84201-0027

Retroactive Reinstatement Process (Within 15 Months)

Organizations that cannot use the Streamlined Retroactive Reinstatement Process (such as those that were required to file Form 990 or Form 990-PF for any of the three years that caused revocation or those that were previously auto-revoked) may have their tax-exempt status retroactively reinstated to the date of revocation if they:

Complete and submit Form 1023 or Form 1024 with the appropriate user fee not later than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

Include with the application a statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file.

Include with the application a statement confirming that it has filed required returns for those three years and for any other taxable years after such period and before the post-mark date of the application for which required returns were due and not filed.

File properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years. The organization should write “Retroactive Reinstatement” on these returns and mail them to:

These organizations should write on the top of the Form 1023 or Form 1024, “Revenue Procedure 2014-11, Retroactive Reinstatement,” and mail the application and user fee to:

Internal Revenue Service P.O. Box 12192 Covington, KY 41012-0192

In addition, the Service will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure.

Retroactive Reinstatement (After 15 Months)

Organizations that apply for reinstatement more than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation if they:

Satisfy all of the requirements described under the “Retroactive Reinstatement (Within 15 Months)” procedure EXCEPT that the reasonable cause statement the organization includes with its application must establish reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file.

In addition, the Service will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure.

Post-Mark Date Reinstatement

Organizations may apply for reinstatement effective from the post-mark date of their application if they:

These organizations should write on the top of the Form 1023 or Form 1024, “Revenue Procedure 2014-11, Reinstatement Post-Mark Date,” and mail the application and user fee to:

Internal Revenue Service P.O. Box 12192 Covington, KY 41012-0192

What’s a Reasonable Cause Statement?

A reasonable cause statement establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures. For a detailed explanation see Section 8 of Revenue Procedure 2014-11.

The reinstatement processes above apply to pending reinstatement applications to the extent they benefit an organization’s ability to be retroactively reinstated.

For organizations that have been previously reinstated from the post-mark date but would have satisfied the streamlined retroactive reinstatement process requirements, they will be retroactively reinstated with no further action. They should keep their reinstatement determination letters and a copy of Revenue Procedure 2014-11.

For organizations that have been previously reinstated from the post-mark date but would have satisfied either the retroactive reinstatement within 15 months process requirements or the retroactive reinstatement after 15 months process requirements, they may reapply under Revenue Procedure 2014-11 on or before May 2, 2014. See Section 10 of Revenue Procedure 2014-11 for details.

Avoid Being Automatically Revoked Again – File Annual Returns

An organization can be automatically revoked again if it fails to file required returns for three consecutive years beginning with the year in which the IRS approves the application for reinstatement. Organizations seeking reinstatement of tax-exempt status after a subsequent revocation are not eligible to use the Streamlined Retroactive Reinstatement Process.

Question: My Arizona nonprofit corporation filed its IRS Form 1023 and applied to the IRS to become a tax-exempt charitable organization. We understand that the current average time for the IRS to approve an application for tax-exempt status is sixteen months. Can we tell prospective donors that their contributions to our charity while its tax-exempt application is pending are tax deductible on their IRS Form 1040s?

Answer: “Yes, but your organization should include the warning that contributions are tax deductible so long as the organization actually gets its tax exemption.

When the IRS approves a timely filed exemption application, exempt status is recognized back to the date the organization was created. Thus, while an application is pending, the organization can treat itself as exempt from federal income tax under section 501(c)(3). For example, it must file Form 990 (instead of an income tax return) while its application is pending. However, contributors to the organization do not have advance assurance of deductibility because the organization’s exemption is pending. If the organization ultimately qualifies for exemption for the period in which the contribution is made, the contribution will be tax-deductible by the donor. Alternatively, if the organization ultimately does not qualify for exemption, then the contribution will not be tax deductible.

9. Ensure a director, trustee, principal officer or other authorized individual signs the Form 1023. Generally, a principal officer is the president, vice president, secretary or treasurer. The person signing the application must indicate his or her title or other authority to sign. A taxpayer’s representative may not sign the application. An original signature is required. Neither a stamped signature nor a faxed signature is permitted.

8. Don’t forget to submit a copy of adopted by-laws, code of regulations or any other document that sets out the organization’s rules of operation, but only if adopted.

7. Include all of the necessary financial data. See the instructions to Form 1023 to determine how much information you need to provide, based on how long your organization has existed.

6. Includethe month the organization’s annual accounting period ends. The accounting period ending date on the application should match the date stated in your by-laws, on financial statements, and on any prior returns filed.

4. Complete allrequiredpages. The information contained on each page and schedule of Form 1023 and Form 1024 is necessary for the IRS to make a determination about your tax-exempt status. Form 1023 has various schedules and pages that must be filled out for churches, schools, hospitals, scholarships, supporting organizations and certain other organizations.

3. Provide enough information about the organization’s activities to show us how it will achieve the exempt purpose. Please don’t restate the purpose. Explain the specific activities that will achieve that purpose. Consider a “who, what, when, where, why and how” approach. Explain past, present, and planned activities. If you haven’t started activity yet, develop plans that provide a clear understanding of how your organization will operate. It is not necessary to describe activities that are speculative at this time.

2. Attach a complete copy of the organizing document and all amendments. If the applicant is a corporation, include a complete copy of the articles of incorporation that shows it has been filed with and approved by the state. If the applicant is not incorporated, include a similar organizing document such as a constitution, articles of association, or by-laws. At a minimum, it should state the legal name, the purposes and the date of adoption. At least two members of the organization should sign the document. A trust document must be signed by the trustees and show the date of formation. For section 501(c)(3) applicants, the organizing document must comply with the organizational test for exemption.

Ensure the application includes a check or money order made payable to the United States Treasury for the appropriate user fee.

Following these ten tips can help shorten the time it takes to process an application for tax-exempt status. A correctly completed application, sent with all required documents and schedules has a good chance of being accepted with no further contact. If contact is necessary, the IRS agent can address the technical issues that need resolution without taking up time to get a completed application.

Question: If my nonprofit corporation files its IRS Form 1023 today, how long will it take before the IRS issues a letter approving the corporation as a tax-exempt Section 501(c) charitable organization?

Answer: See the the IRS’ web page called “Where Is My Exemption Application?” to determine how far behind the IRS is in reviewing applications for tax-exemption. We know of organizations that have received favorable IRS determination letters as quickly as six weeks and as long as two years after submitting applications for tax exemption.

Question: Our nonprofit corporation filed its IRS Form 1023 many months ago and has not yet been approved as a tax-exempt charity by the IRS. Does the corporation have to file its tax return on IRS Form 990?

Yes: A nonprofit corporation that seeks to become a 501(c)3) tax-exempt charity must file an IRS form 990 for the period beginning the day the corporation is formed even if the IRS has not yet approved the corporation’s application for tax exemption. The tax return must be filed EVEN IF THE CORPORATION DID NOT HAVE ANY INCOME!

If the corporation ultimately gets its tax-exemption, but failed to file Form 990s for three consecutive years, the IRS will automatically revoke the corporation’s tax exemption.

Number 10. Is there enough financial data? See the instructions to Form 1023 or Form 1024 to determine how much information you need to provide, based on how long your organization has existed.

Number 9. In what month does the annual accounting period end? Applications should indicate the end of their fiscal year. It is a good idea to check for consistency. Does the fiscal year ending date stated on the application agree with the fiscal year ending date stated in the by-laws, on the financial statements, and on any prior returns filed?

Number 8. Did you provide the required information on the principal officers and board of directors? Applications should list the following information concerning the governing officials:

names,
mailing addresses,
titles and positions,
annual compensation.

Number 7. Did you provide enough information on the activities to show us how your exempt purpose will be achieved? Please don’t restate your purpose, but explain the specific activities you will carry on to achieve that purpose. You should consider a “who, what, when, where and why” approach. You should explain past, present, and planned activities. If you haven’t started an activity yet, develop your plans well enough that we can have a clear understanding of how it will operate. You are not required to describe activities that are merely speculative at this time.

Number 6. Did you complete all required schedules? You should check the line items on the financial statements. Some lines require supporting schedules.

Number 5. Did you complete all required pages? To make a determination, the information contained on the pages and schedules of Form 1023 and Form 1024 is necessary. On Form 1023, there are various schedules and pages that must be filled out for churches, schools, hospitals, scholarships, supporting organizations, and certain other organizations.

Number 4. Did a director, trustee, principal officer, or other authorized individual in a similar capacity sign the Form 1023 or Form 1024? Generally, a principal officer is the president, vice president, secretary, or treasurer. The person signing the application must indicate his or her title or other authority to sign. A taxpayer’s representative may not sign the application. Neither a stamped signature nor a faxed signature is permitted.

Number 3. If you have adopted by-laws, did you submit a copy? You need to provide a copy of your by-laws, code of regulations, or any other document that sets out the organization’s rules of operation, but only if adopted.

Number 2. Did you attach a complete copy of your organizing document and all amendments? If the applicant is a corporation, this would be a copy of the articles of incorporation that shows it has been filed with and approved by the state. If the applicant is not incorporated, it should have a similar organizing document. This could be a constitution, articles of association, or by-laws. Whatever the document is called, it must at the minimum state: the legal name, the purposes, and the date of adoption. The document should be signed by at least two members of the organization. A trust document must be signed by the trustees and show the date of formation. For section 501(c)(3) applicants, the organizing document must comply with the organizational test for exemption.

The Number 1 reason for delays in processing exempt organization applications is . . . INCORRECT OR NO USER FEE!

Now that you know the ten most common pitfalls in the EO application process, please avoid them. If your application is completed correctly initially, and sent with all required documents and schedules, there is a good chance your organization could be recognized as exempt with no further contact. If there is contact, the agent can address the technical issues that need to be resolved without taking up your time trying to just get a complete application.